Solvency II news: Transatlantic regulation, Private equity

Contents: Transatlantic regulation, private equity.

Transatlantic regulation discussed

Discussions on the regulation of US and EU insurance groups were held at a conference organised by the International Centre for Insurance Regulation (ICIR). The Conference on Transatlantic Insurance Group Supervision (7-8 September) was set up to promote dialogue between regulators and members of the industry. The conference featured high level speakers from EIOPA, NAIC, IAIS, and the European Commission. In a statement published ahead of the conference, Susan E. Voss, NAIC President and Iowa Insurance Commissioner said, “Our national system of state regulation is well-tested and oversees the largest, healthiest and most dynamic insurance markets in the world.” “In this interconnected financial sector,” she added, “we have a responsibility to ensure that the regulatory regimes being tested elsewhere won’t harm U.S. insurers, which could then negatively impact U.S. consumers.” The importance and challenges of international supervision were discussed in a speech by the Chariman of EIOPA, Mr Gabriel Bernadino. Speaking about the ComFrame initiative, Mr Bernadino said, “In a globally integrated market economy, where concerns about a level playing field and protectionist pressures are real, it is vital to develop and implement strong international standards leading to better supervisory coordination and cooperation in the oversight of the most important global financial firms.” “In my view,” Mr Bernadino added, “group supervision will remain one of the most challenging fields of regulations and most prominent agenda topics for industry and supervisors alike – at least for the next decade. Mr Bernadino’s speech and other presentations and programmes are available on the ICIR event website. The ICIR is located in the House of Finance at the Goethe University in Frankfurt. Set up in October 2010, the centre claims to be, “the first scientific institution worldwide focused on the regulation of insurance companies.

Private equity under Solvency II

The stress factor for investing in private equity under Solvency II should be calculated using time series data for unlisted firms, rather than the current method that uses an index of listed firms. The Partners Group, a global private markets investment management firm, published a report, Private equity under Solvency II: Evidence from time series models, which argued that using an index for unlisted private equity from Thomson Reuters provided more granular calculations for firms that have significant exposure to the asset class. Currently private equity falls under the same category as hedge funds and emerging markets equities. The LPX 50, an index of publicly listed private equity firms, has been used to calibrate the stress factor under the standard model. However the report argued that the LPX 50 “does not capture the characteristics of an unlisted private equity portfolio”. Instead it said that the Thomson Reuters index, which captures data of unlisted private equity investments since the mid 1980s, provides a sample that is, “representative enough to be used as an index for private equity investment and that the data quality is sufficient.” The report concluded, “The currently proposed stress factor for private equity of 49% can in our opinion not be backed by actual data from unlisted private equity. In contrast, using time series models it is possible to show that the requested 99.5% VaR for private equity is considerably lower and does not exceed 30% over the observed time period when a symmetric dampener is taken into  consideration.”

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